Current Marketing Thoughts

Kevin Van Trump has over 20 years of experience in the grain and livestock industry.

Why Corn & Bean Prices Continue To Break

Nov 19, 2010

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Just as I had mentioned in earlier reports, I am now hearing confirmation that fund managers in both the US and Europe have been liquidating length in the Ag Markets in order to salvage what is left of their massive profits and pre-holiday bonuses. Remember many of their bonuses are predicated on "closed-positions" not "open-trade-equity". I am hearing rumors that they are closing the books in several sectors and many will be celebrating a magnificent year of profits. I doubt you will see very much between now and the new year that will encourage them to risk their bonuses and banked profits to get back in. I anticipate after they have completed their mass exodus of the commodity markets, volume will drop significantly and volatility will escalate in a chopping like manner. Hopefully trending back to higher ground.

Funds were estimated to have lifted over 40,000 long positions in the corn market yesterday and 15,000 soybean positions. Funds are now long just over 350,000 contracts in corn, and over 175,000 in beans. I am going to guess that they are long about 75,000 contracts of KC Wheat and now actually short 10,000 or more Chicago Wheat contracts.

Brazil Reports Its First Possible Case of Mad Cow Disease

Here we go. Brazil the world’s largest beef exporter has come out and reported its first suspected case of Mad Cow disease. From what I am hearing the city of Campinas, in Sao Paulo state, was notified of the possible case on November 12th, and have kept the news under wraps. This could be huge considering Brazil’s beef exports totaled more than $4 billion last year. It will be interesting to see how this plays out. I know how rumors can circulate, so look for more confirmation before moving aggressively on the news. I picked up some cheap $103 calls for less than $150 each in the overnight. They only have 18 days until expiration but if the story gains momentum Exporters may look to the US for immediate supplies. I doubt this will be good for the corn market if it ends up being true. Killing any % of the herd will obviously reduce overall corn demand.

Wheat Trading Strategy
The wheat market looked great out of the gates yesterday, but seemed to fail in the final leg on further liquidation and profit taking. As most of you know I continue to feel wheat has some significant upside potential, despite the current break in price. I read an interesting fact yesterday that pointed out that Egypt has now purchased close to 700,000 metric tons of wheat from the US. Do you realize last year at this time they had imported zero US wheat. To top it off, I just heard reports that Egypt is back in the market this morning looking for both hard and soft wheat. They are looking to buy up to 60,000 tonnes of hard wheat and additional cargoes of soft wheat for shipment in late January. If you looking to make a play in this market consider a "Bull Call" Spread. We like buying the March $7.00 call and selling the March $8.00 call. We are going to leg into this trade buying the $7.00 call outright and waiting for a continued rally to sell the $8.00 call. Less aggressive traders can put the trade on as a spread at a cost of $0.25 to the buy side. This gives you a way to play the wheat with a limited risk of $1,250 per unit.

China Taking A Break From US Beans

I am hearing China has chilled out a little on the nearby US Bean market, and was actually able to grab a few cargoes from South America cheaper the past few days. I doubt this is anything significant, but I will be watching to see where their next few purchases come from.

More On The Argentina/Chinese Corn Negotiations

I wanted to let you know that Argentina has reportedly granted export licenses for 5 million tons of corn. Be careful just assuming this is100% bullish news. Sure, right now it is being rumored that this could all be part of the Chinese buying agreement, but be cautious assuming this as fact just yet. In the years past Argentina typically does not grant licenses until they have a really good grip on their corn production. Most in the marketplace were anticipating Argentina to issue licenses for 3 million tons of corn, not 5 million. Some will argue this is bullish in anticipation that it will all go towards the China deal, others are saying it could be bearish because it indicates Argentina is preparing for a big crop. I think somewhere in the middle lies the truth. The crop certainly went in early, and there were more acres planted, which could certainly mean the odds of a bigger crop are in play. Right now though the weather has turned dry and for the first part of November, Argentina has seen about 50% below their normal rainfall for the month. I personally think the Argentine government is preparing for a slightly larger crop than we are anticipating, and I also think they have a side deal cut with China to export an undetermined amount of corn during the next 4-6 months.

Ethanol Demand Continues To Rise
Ethanol demand continues to surge despite the markets action. Across the news wires has come a report that Pacific Ethanol will once again start up production of ethanol after closing their California plant in 2009. I heard the plant can produce 60 million gallons of ethanol a year. The plant was supposedly closed in 09 because of "unfavorable market conditions". Obviously their view has changed, or maybe they know something we don't about the future of ethanol demand. This is no small company, they have several other large plants across the US.

What Is All The Talk About Inflation

Right now all the fund traders and big boys want to focus their attention on "inflation". I have had lots of calls as of late, and the best way I know how to explain Inflation, in today's terms is when too many dollars start chasing too few of goods. Now obviously in most countries like the US and Europe the the economy hasn't been so hot, so there really hasn't been a shortage of any goods so to speak. There has however been a massive increase in the number of dollars made available to purchase the goods. As more money is poured into the market place there should be more available dollars to bid on goods, in turn driving up prices. In China inflation has become a real problem because the economy has caught fire which has shrank supplies while they still have a large amount of money in the marketplace to bid up prices even higher. This is why China is trying to reign in money supplies by raising interest rates and slowing their economic growth. Hope this helps.

One Of The Nations Largest Livestock Operations Under Federal Investigation

One of our clients called with news that Eastern Livestock Company (one of the nations largest livestock brokerages in the country) is under federal investigation after allegedly issuing millions of dollars in worthless checks for cattle sold on the market earlier this month. The stories floating around are that they have written in the neighborhood of $80 million in bad checks to cattle producers around the country in just a one week time period from November 3rd to the 9th. On top of that Fifth Third Bank out of Cincinnati has frozen all of their accounts and filed a legal complaint that is accusing the company of stealing in the ballpark of $13 million from the bank in some type of elaborate "check-kiting scheme." This is not some small potato deal, Eastern buys and sells cattle in all 48 states, and I am sure it will send a shock wave across the board. Farmers who sold cattle during this time period have simply not received any checks in the mail, and the ones that have are saying the checks have bounced. I doubt we have heard the last of this story...I just wanted to make you aware. Thanks again Tom for bringing it to my attention.

Could Higher Food Inflation Actually Be What The Government Wants

As many of us sit and watch prices at the grocery store head higher, and governments all across the globe tell their citizens they are doing what they can to help out, you have to wonder if this is truly the case. If you consider China for example, higher food prices and lower industrial activity would actually work very well for them as they try and balance growth between the urban and rural communities. Let me take this one step further and have you consider how higher food prices may be benefiting the US and the other countries who have printed massive amounts of money as part of their economic bailout plan. As governments print more money and create more debt they are increasingly pressured to increase their revenue in order to pay for their spending. What better way to increase revenue than higher food prices. Higher prices at the store mean higher taxes collected at the register. Higher prices for corn, beans and wheat mean farmers will have a larger tax burden. New equipment purchases will be met with more sales taxes collected. Higher prices will also help reduce the farmer subsidies and tax incentives that the government has been dolling out. As you can see from my argument, farmers are not necessarily the ones benefiting from higher food prices, but rather the governments seem to be the big winners. Think of it this way, assume the government gets 30% of every dollar you make in the form of income taxes. On top of that the government receives a portion of every dollar you spend in the form of sales tax. As they print and spend more money the governments are under pressure to increase their revenue, this is done by generating more tax dollars. Obviously the government would like to see the public sector create more jobs, as this would increase their revenue from income tax. This isn't happening. Next they would like to see you spend more money on "goods", this would generate more sales tax revenue. This isn't happening much either, people are continuing to save. One sure fire way to generate more tax revenue though is with higher "food prices". People have to eat. The larger the % of your income that is spent on food, the larger the % of tax revenues collected from each person. As the worlds governments fall further and further in debt, I would have to imagine the higher food prices are being meet with open arms.

Wheat Trading Strategy
The wheat market looked great out of the gates yesterday, but seemed to fail in the final leg on further liquidation and profit taking. As most of you know I continue to feel wheat has some significant upside potential, despite the current break in price. I read an interesting fact yesterday that pointed out that Egypt has now purchased close to 700,000 metric tons of wheat from the US. Do you realize last year at this time they had imported zero US wheat. To top it off, I just heard reports that Egypt is back in the market this morning looking for both hard and soft wheat. They are looking to buy up to 60,000 tonnes of hard wheat and additional cargoes of soft wheat for shipment in late January. If you looking to make a play in this market consider a "Bull Call" Spread. We like buying the March $7.00 call and selling the March $8.00 call. We are going to leg into this trade buying the $7.00 call outright and waiting for a continued rally to sell the $8.00 call. Less aggressive traders can put the trade on as a spread at a cost of $0.25 to the buy side. This gives you a way to play the wheat with a limited risk of $1,250 per unit.

Will China Become A Global Exporter of "INFLATION"...?

Think about this for a minute, Wal-Mart, Gap, J.C. Penney, Target and other US retailers are reporting higher prices in clothing. In fact most are suggesting payments to Chinese suppliers have increased by as much as 30%. I know you have seen cotton prices surging higher as of late (up more than 70% this year alone in China), and stockpiles are now at their lowest levels since 1995. From here it doesn't look like prices will be falling back for the retailer anytime soon. Therefore American's should prepare for higher prices in the months ahead. As China has gained control of global manufacturing, and inflation continues to run wild it should only be a matter of time before China truly starts exporting massive inflation to other areas of the world. Just look around, everything manufactured in China will soon carry a little additional weight in the form of "inflation".

For Their Second Act China Will Be Forced To Slow Down Inflation
I am telling you now the only real way to slow down inflation is to accelerate supply. This will be the only way for the Chinese to control food prices in the months ahead. You have to believe talks with Argentina are just the tip of the iceberg. It's only a matter of time until they are forced to ramp up importers even further.

Trading The Cattle Market

From the way it looks now we may have seen the lows in the Choice / Select cutout values, at least for the next 45-60 days. I think that may even be a little conservative. The only way we go back to test those lows in the mean time is if international and domestic beef demand simply falls apart. Down the road, yes I think that could happen, but not in the next 45 days. I continue to stay short the $98 and $96 Dec 2010 puts and look to be in great shape on these positions. Looking further out though I am starting to sing a little different tune, and don't seem to be as optimistic as I once was. I am not arguing the fact that export demand should continue to grow, I just think the board has priced in too much opportunity in the deferred contracts. I think we will have a chance to buy this market back a little cheaper once we get past the holidays. From there domestic and international demand could start to waver and premiums could pull back.

*Producers looking to hedge may want to consider making a sale in the April or June contract. Rather than selling straight futures, I personally would rather see you go out and sell (1) April $112 call and buy (1) $106 at-the-money put for around $600. This gives you downside protection in case the market breaks and gives you upside potential on the cash side to around $110.50. Keep in mind the "Fats" contract is only 40,000 pounds. Based on 1,200 pounds per head this would protect you on roughly 33 head of cattle. Although many advisers would try talking you into this type of strategy on your entire herd (because they get paid more), I personally wouldn't advise initiating this type of position on any more than 30% of your herd at this time, as it ultimately caps your upside potential. It is a great strategy to use but must be done in proper proportions. Just like everything else in life we always want to overdo the "good things", until we figure out moderation is the key to long-term success. Trust me when I say it sounds great on paper, but I have experienced the pain it can bring in real life. If cattle goes to the moon and all your buddies are driving around in bright shinny new trucks, but you can't get one because you listened to some knuckle-head adviser tell you to hedge 100% of your herd you are going to be pissed. I am just shooting you straight. It's a great play, but don't over do it.